The recent resurgence of net capital inflows to the mainland was a result of receding expectation of the yuan's depreciation and not necessarily the return of speculative investments, according to an official of the foreign exchange regulator.

'It's hard to say that the hot money is back,' Guan Tao, a deputy director for the department of international payments at the State Administration of Foreign Exchange, told a financial forum in Beijing yesterday.

'The industry has stabilised and overseas investors did not need to withdraw money from China as they did during the peak of the crisis.

'In addition, the apparent growth in the net buying of foreign currencies by Chinese banks simply reflected that the market expectation for yuan depreciation has weakened significantly.'

The People's Bank of China recorded a net purchase of US$35.5 billion worth of foreign currencies last month, up from US$22.5 billion in April and US$17.8 billion in March.

Talks of a possible depreciation began to weigh on the yuan in the final quarter of last year when the country's economic growth slowed due to the global financial crisis and officials hinting at devaluing the currency to help plunging exports.

But the improved figures in the first quarter had dampened expectation on depreciation, currency traders said.

'In mid-April, market sentiment turned around remarkably with the pricing in the foreign exchange forward market suggesting a trend in favour of a stronger yuan against the US dollar later this year,' said a trader based in Guangzhou.

Li Wei, an analyst with Standard Chartered, said: 'I think we better wait until the next official release of foreign exchange reserves to make a judgment [on whether there are significant increases in capital inflows]. This abrupt surge could be the result of exporters settling their foreign currency holdings early.'